Irish equities are now forecast to grow ahead of expectations in 2006 after a strong start to the year, according to Davy Stockbrokers.

The Iseq index will grow by 22 per cent to a record high of 9,000 by the end of the year, Davy said this morning in its weekly market comment. The broker predicted at the start of the year that the index would grow by 15 per cent to a level of 8,500. However, the market has already grown by 8 per cent this year, carrying on from strong growth of 12 per cent in the final two months of 2005.

Earnings growth for Iseq-listed companies, excluding Elan, is currently forecast at more than 13 per cent, but Davy said it expected this figure would rise. "Given the very strong momentum behind the Irish economy in 2006 and 2007, we expect three to four percentage points will be added to this forecast for earnings growth as the year unfolds," said Davy chief economist Robbie Kelleher.

Davy said earnings figures released by AIB and McInerney were a flavour of the momentum behind Irish companies.

Over the next month, most companies with financial years that end in December will report figures and Davy said it believed they would confirm the early "striking and impressive" momentum shown by AIB and McInerney.

Profits at AIB increased 23 per cent to €1.7 billion in 2005, while profits at building group McInerney rose 26 per cent to €50 million, it was announced last week.

The Irish market's strong start to the year, following an impressive finish to 2005, mirrors the performance of equity markets in Europe, where the FTSE Eurofirst 300 is up over 6 per cent so far this year.

Davy said the undervaluation of European and Irish equities was the reason for their continued performance. Earnings yields of 7.5 per cent mean European equities still look to be "compelling value" compared to bonds, Davy noted.

The stockbroker said the mispricing of equities relative to bonds had been "driven in large part by self-defeating, liability-driven purchases of bonds", but that it believed that this trend would be reversed over the next number of years.